Interest Margin, Market Power, Diversification Strategy and Banking Stability: Evidence from ASEAN
33 Pages Posted: 11 Feb 2016
Date Written: February 10, 2016
Abstract
Interest margin, as the main sources of revenue plays an important role in maintaining banking stability. Additionally, increasing market power and shifting the business to non-traditional products has been seen as promoting banking stability. Theoretically, Martinez-Miera & Repullo (2008,2010) suggest non-monotonic correlation between competitions and risk taking in the loan market. However, studies on relationship between diversification and banking stability reveal mixed results. This study aims to examine the impact of interest margin, market power and banking diversification strategy on stability in ASEAN-4 (Indonesia, Malaysia, Thailand and the Philippine) banking system. We estimate the long-term equilibrium with random effect panel data regression model. Furthermore, to obtain the short-term dynamics relationship between the variables in the model and to solve endogeneity problems, we estimate the model of dynamic panel data using System of Generalized Method of Moment (GMM). After controlling for foreign bank penetration, bank specific variables and macro-economic variables, we find intermediary activities that generate interest margin are remaining as dominance factor to promote banking stability in the region. In addition, non-traditional products may help bank to reduce risk and promotes stability. Additionally, focused-banks which are channelling special types of loan might charge higher margin and lowering bank probability of default. Furthermore, an increase in market power as a consequence of banking consolidation will increase banking stability, and it is consistent with “competition fragility” hypothesis. However, this study could not support the non-linear relationship between competition and banking stability. This study also finds that foreign bank penetrations is positively and significantly affect banking stability. However, larger banks tend to take excessive risk therefore reduce stability.
Keywords: ASEAN, Banking, Diversification, Foreign Bank Penetration, Interest Margin, Market Power, Stability
JEL Classification: G21
Suggested Citation: Suggested Citation